The U.S. dollar rose to its highest level in nearly three years in the lower 113 yen range and Tokyo stocks fell on Tuesday, as surging oil prices fueled concerns about inflation and higher interest rates in the United States.
The dollar advanced to 113.49 yen, the highest since December 2018, before fetching 113.29-30 yen at 5 p.m. compared with 113.25-35 yen in London at 4 p.m. and 112.78-80 yen in Tokyo at 5 p.m. Monday. The U.S. currency and bond markets were closed Monday for a national holiday.
The euro was quoted at $1.1555-1556 and 130.91-95 yen against $1.1570-1580 and 131.05-10 yen in London and $1.1574-1575 and 130.53-57 yen in Tokyo late Monday afternoon.
The 225-issue Nikkei Stock Average ended down 267.59 points, or 0.94 percent, from Monday at 28,230.61. The broader Topix index of all First Section issues on the Tokyo Stock Exchange finished 13.90 points, or 0.70 percent, lower at 1,982.68.
The dollar held firm in the lower 113 yen zone throughout the day in tandem with a rise in the long-term U.S. Treasury yield during off-hours trading as the inflationary pressures from higher oil prices solidified the view that the U.S. Federal Reserve will start reducing massive asset purchases as early as November, dealers said.
The move by the U.S. central bank sharply contrasts with the policy of the Bank of Japan, which has kept its ultraeasy monetary policy intact to support the economy from COVID-19 fall out, while the country's inflation rate remains subdued.
"A divergence in monetary policy between U.S. and Japanese central banks is pushing the dollar up against the yen," said Yuji Saito, head of the foreign exchange department at Credit Agricole Corporate & Investment Bank in Tokyo.
"Traders also sold the yen as higher oil prices raised concerns over Japan's (possible) growing trade deficit," as surging energy prices would cause a sharp increase in the value of imports and increase demand for the dollar to procure oil, Saito added.
In the stock market, investors locked in gains made the previous day on lower U.S. shares overnight, as soaring crude oil futures, which closed at about a seven-year high, stocked fears about rising prices, often seen as a negative factor for stocks as they could squeeze corporate profits, brokers said.
In addition, rising interest rates in the United States are also seen as a risk to the market as they increase borrowing costs for companies, brokers said.
"Investors took profits as Wall Street fell, with electric power and air transportation sectors hit by rising oil costs," Seiichi Suzuki, chief equity market analyst at the Tokai Tokyo Research Institute.
But Suzuki added a spike in oil prices pushed up oil explorers, nonferrous metal makers and trading houses in Japan and falls in the stock markets would reverse their course if the upcoming quarterly U.S. earnings turn out to be positive.
Explorer Inpex rose 17 yen, or 1.8 percent, to 982 yen, Nippon Light Metal Holdings advanced 46 yen, or 2.4 percent, to 1,968 yen, and trading house Mitsubishi climbed 84 yen, or 2.3 percent, to 3,703 yen.
On the First Section, declining issues outnumbered advancers 1,743 to 375, while 65 ended unchanged.
Among electric power and gas issues, Chubu Electric Power fell 21.0 yen, or 1.6 percent, to 1,301.0 yen and Kansai Electric Power sank 21.5 yen, or 1.9 percent, to 1,084.0 yen.
As for airlines, Japan Airlines slid 56 yen, or 2.2 percent, to 2,548 yen and ANA Holdings shed 56.0 yen, or 2.0 percent, to 2,764.0 yen.
Trading volume on the main section dropped to 1,134.93 million shares from Monday's 1,194.17 million shares.
In the bond market, the yield on the benchmark 10-year Japanese government bond was unchanged from Monday's close at 0.090 percent.